Blog Post

Apple Revenue Grab May Rock the Boat, Not Capsize It

There’s a lot of chatter out there that Apple’s new subscription plans could endanger its relationship with app developers and content providers, and might even incur unwanted legal attention. Apple (s aapl) may be in for a bumpy ride as it moves to implement the new system, but don’t think it’s anywhere close to capsizing.

Some of the response so far from content providers has been clearly-stated opposition to Apple’s plans. Rhapsody, for example, suggested that it might pursue legal action, pending an inquiry into the viability of such action. The reason? It simply isn’t tenable for Rhapsody to pay Apple its 30 percent cut, after other expenses:

An Apple-imposed arrangement that requires us to pay 30 per cent of our revenue to Apple, in addition to content fees that we pay to the music labels, publishers and artists, is economically untenable. The bottom line is: we would not be able to offer our service through the iTunes store if subjected to Apple’s 30 per cent monthly fee vs a typical 2.5 percent credit card fee.

Note, however, that Rhapsody’s response wasn’t to remove its iOS applications in protest. In fact, it signalled its intention to continue to offer its service uninterrupted on the platform in its current form until it was no longer able to do so. Other parties in a similar situation as Rhapsody, including Amazon(s amzn), which distributes books (incurring additional content fees to publishers) and Netflix (s nflx) (which has to license all of its videos from studios) have notably silent on the issue thus far.

Silent, too, are publishers, which are the parties referred to specifically in Apple’s new subscription pricing plans. News Corp. (s nws) is obviously on board and happy to accept Apple’s terms for the time being, since in-app subscriptions were first introduced in its iPad newspaper app, The Daily. Popular Science, Elle and Nylon followed suit shortly after Apple’s announcement yesterday with in-app subscriptions of their own. While that isn’t exactly an overwhelming tide of support, it’s far from an outright negative response.

The truth is that publishers and distributors are watching and waiting, because they can’t afford to do otherwise. Rhapsody can’t afford to acquiesce to Apple’s new demands, but it equally can’t afford to abandon the platform. Others like Amazon are probably in the same boat, working behind the scenes with Apple to see if compromise is possible and waiting to see where the chips will fall. But hoping for a compromise or a retreat by Apple might ultimately prove fruitless. Analyst Mark Little from technology research firm Ovum sums up quite well why Apple might even be willing to risk the loss of these partners in the end:

[I]t is unlikely the new subscription model will upset iPhone owners and aspirers enough to switch to Android; interestingly the new model could also helps clear the ‘idecks’ of competition, and the loss of the likes of Rhapsody and the Kindle Store can be easily replaced by Apple services such as iTunes or iBook and exclusives such as ’The Daily.’

Apple launched the iPhone platform without app content partners, and it still has content libraries of its own in place through iTunes and iBooks, as well as the largest library of apps available to a mobile platform, and at least some publishing partners willing to accept its revenue-sharing terms in search of broader audiences. And what choice do those publishers really have? Magazines and print publications turned to the iPad in the first place because of dwindling print sales. Android looks to possibly provide safe harbor for those media companies with its new micropayment system, but in the end, weren’t those companies looking to iOS to shore up reader and viewership numbers, not the other way around?

Record companies and film and television studios found (and likely continue to find) Apple’s terms onerous and unfair. Yet both ultimately accepted that in terms of digital distribution (more and more the distribution method of choice for consumers), Apple was really a distributor they couldn’t live without. This latest ultimatum to publishers isn’t an unprecedented tipping point; it’s the next natural step in Apple’s evolution as a distribution channel. As for antitrust concerns, that’s also nothing new for Apple, and the company has proven well-able to answer such questions in the past without significantly altering the way it does business.

In the end, Apple’s new subscription rules might slightly alter the composition of the App Store, but it won’t change its reach or influence on the mobile market. A 30-percent cut may be too much for some to swallow, but for the thousands of companies that wouldn’t have a revenue model to begin with without the App Store, it’ll still be the best deal in town.

Related content from GigaOM Pro (sub req’d):

6 Responses to “Apple Revenue Grab May Rock the Boat, Not Capsize It”

  1. It’s interesting to me how much the comments here coincide with my own response. I am a big fan of Apple products and sold my Kindle when I got my IPAD. I completely agree that the Kindle platform is superior to any other available. It’s ubiquity and usability are unparalleled. Apple might not run me off right away but if they interpret their success as justification for ignoring customer needs and limiting customer choice I will eventually leave. In the meantime, if the Kindle app leaves the IPAD I will buy a Kindle for my ebook reading. It sounds like others agree with me on this issue.

  2. Since most of the content providers operate with under 30% profit, I can only see two outcomes here. Either prices will go up which hurts me, the customer. Or the content providers will leave the platform (and also possibly die). Lets see what this will do.

    The first will piss me (the consumer) off.

    The second will piss me (the consumer) off, will make me consider platforms other than the iOS ones.

    There is an added bonus to the entire thing. This all also pisses developers off. Another one of those arbitrary moves of apple that screws a lot of people over completely. With Android gaining market share such rates, Apple cannot afford to piss off their developers too much. They don’t want them to start developing for Android or first for Android. Yes, we can argue about Android’s profitability (yes, Android users are cheap). But still. Bad move.

    And as far as I am concerned, I rarely purchased content from Apple (mainly because they lock you in and pull this kind of crap too often). I will be sure to continue my good practice and encourage everyone around me to do the same. Will never give up my Mac as I hate the Windows/Linux user experience but they only get my money for the hardware and software they make and I use. I already switched to Android. Cannot say I enjoy the change but I needed an unlocked phone with no contract attached and could not afford to drop $1000 for an unlocked iPhone in Europe. (And it is not like they are willing to sell me one in the US. No, I don’t jailbreak/root anything. I shouldn’t have to.) So Nexus One it was. The user experience is rocky but I give them until the fall (read: Ice Cream) to figure that out. I will have the option to get on a contract in the fall again. But the iPhone looks less and less appealing. That screen better be 4″ (because I do want that), that built in SIM will have to be VERY travel friendly to convince me to switch back. And they better offer a world warranty as well. But I am starting to ramble (or already there… :)

    Today, I decided never to buy anything again from the Mac App Store unless it is an Apple product or not available any other way. Resist Apple’s uncompetitive practice. Everybody do the same!!! And go tell Apple what you think about the current move.

  3. Remarks like this one by analyst Mark Little border on the bizarre: “and the loss of the likes of Rhapsody and the Kindle Store can be easily replaced by Apple services such as iTunes or iBook and exclusives such as ’The Daily.’”

    What planet is he living on? Tom’s posting is right. iBooks isn’t remotely up to the Kindle in features, book selection, or platform support and the gap is widening rather than closing. Those in publishing are already noticing that Apple doesn’t seem to be nearly as committed to its iBookstore or iBooks as Amazon is to the Kindle and its Kindle apps. I’d hoped Apple would give Amazon some healthy competition. That doesn’t seem to be happening.

    Look at the numbers. Amazon’s entire ebook markup is typically 30%. There’s no reason for it to distribute via iDevices if Apple’s going to grab every penny of that. Good sense suggests that if this madness becomes an enforced policy (meaning Apple yanks the Kindle app), then Amazon will simply drop the platform, offer its iDevice-only Kindle customers a refund, and concentrate on drawing more people into buying a Kindle or a Droid phone.

    Keep in mind that, given the three-fold price gap between Kindles and iPads, Amazon can sell a Kindle to almost everyone who wants just an ereader AND to everyone who is also owns an iPad but wants to buy ebooks from Amazon.

    The reverse is not true. If Apple loses the Kindle app, they’ve eliminated a major reason for serious readers to buy an iPad–the money they save by buying ebooks. Those potential customers will buy Kindles instead and use the money they’ve saved to buy more books from Amazon. Apple loses twice over.

    Nor are avid news readers going to be happy limited to “exclusives such as ’The Daily,’” as Mark Little claims. People who want to read the news, want to read widely. They’re not interested in “exclusives.” Even worse for Apple’s plans, Google has just announced their own system for periodical distribution that takes only 10% from publishers and offers far more flexibility in how periodicals market and sell their products. (Google clearly lacks Apple’s obsession with control.) If you can do more and make more with Google, why would anyone bother with Apple?

    Apple’s executives are making a serious mistake. They were able to get nasty with the music industry and demand 30% because in 2001 they were the only viable, full-featured music distribution game in town. They’re acting as if the same situation exists with digital books and periodicals a decade later. It doesn’t. Amazon, B&N, and Sony have their own functioning store-to-device distribution systems in place and the first two have a larger share of the ebook market than Apple. And with periodicals, Apple faces serious competition building from both Amazon and Google. It can’t act as if that competition doesn’t exist.

    In short, Apple not only doesn’t have the only game in town, they’re far from offering the best game. They’re certainly big enough to upset almost everyone with their demands, but they’re far from big enough to enforce them.

    And as a writer this ticks me off. I want I healthy, smoothly functioning market for ebooks. What we have now is a nasty cat fight.

    –Michael W. Perry, author of Untangling Tolkien

  4. As an iPad owner, I will be watching this very closely. I have been very happy with the iPad and have been anticipating the iPad2. However, it is all about the content for me. If this move impacts availability of content – such as the Kindle App, Kobo, magazine subscriptions that I am interested in – I will be selling the iPad and moving to another tablet platform where I can get that content. From my perspective, as a customer who bought an iPad – Apple should be very careful in restricting who I can buy content from – otherwise they will likely lose me as a customer. A key selling point for me in getting an iPad was that I could access my content from I purchased through companies like Amazon and Kobo on the iPad. iBooks is not a competitive offering in comparison to these services and to that it can replace them is simply not true.

  5. It would be easy to say iBooks can replace Kindle if that were true, but it’s not. iBooks is a pale imitation of what Kindle offers users. As a recent ebook convert myself (and rabid iPad and iPhone lover,) I am appalled at the thought of being essentially forced to use iBooks and it’s scant selection of books (some at absolutely ridiculous prices, I might add) when Kindle has an enormous selection. If anything, this will prompt me to buy a Kindle rather than move my buying habits to iBooks. It’s not some kind of weird zealotry for the Kindle. It’s that I want and deserve the marketplace Amazon offers. If Apple had that on offer with iBooks, I’d happily make the switch. The don’t, and I likely won’t.

    One thing I don’t see many mentioning. All of this pops up at an interesting time: during MWC, which Apple is not taking part in. They may not be there, but this kind of news out there, along with rumors of new smaller iPhones, ongoing rumors of the new iPad, new Macbooks, etc., helps overshadow practically anything that might come out of MWC and keep attention squarely on Apple – negative or positive, it just keeps the company in the spotlight. I wouldn’t be surprised if, after the conference is over, we see much more meaningful news regarding this clause in the App Store contract directly from Apple themselves – and which calms the nerves of us Kindle app lovers. They are very good at this.

    • @Tom That was a really good comment. I actually forgot I was reading a comment about halfway through and thought I was reading an article. And I agree with your assertions.